By Fergus J. McCormick and Giacomo Barisone
DBRS Sovereign Ratings Group
There has been much speculation on the implications of a “Yes” vote in the referendum whether Scotland should gain independence from the United Kingdom. Many commentators see the near term consequences of a “Yes” vote as dire for Scotland, crippling for the remaining UK, and foreboding for independence movements across the European Union. Others believe Scotland would be better off as an independent nation. Whatever the long-term consequences, a “Yes” vote would raise more questions than answers, and this could be destabilising to financial markets and businesses in Scotland and possibly in the UK. But what about a “No” vote?
The most recent surveys suggest that the referendum was too close to call. Of 4.3 mln registered voters, some 258,000, and perhaps more, are undecided. A September 16 ICM poll for The Scotsman showed support for remaining in the UK at 45%, while 41% of voters backed independence. The remaining 1,000 plus voters were undecided or planned to abstain. A separate Opinium poll published in The Daily Telegraph showed 47% were pro-union, while 43% supported independence; 1,156 voters were undecided. A simple majority of votes in favour of independence is needed to end the union with the rest of the United Kingdom. In any event, the referendum has already caused uncertainty. This is evident in the recent movement of sterling, which has depreciated by 5.4% since July 2. (See Exhibit 1.)
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A “No” vote would of course be far less destabilising than a “Yes” vote and could result in a return of investor confidence in the near term. Uncertainty over political risk and macroeconomic stability would be greatly diminished, especially in the event of a wide “No” vote. However, even a resounding “No” vote would not imply a return to normality.
First, the leaders of the three main union parties have pledged a greater devolution of powers to the Scottish Parliament if voters vote “No”.
However, it is unclear exactly what these powers would entail. Scotland's independence movement would likely continue to be a powerful political force, with the potential to press for further concessions from Westminster over autonomy. Furthermore, the promise of greater devolution to Scotland could trigger similar demands from the rest of the UK, opening up the prospect of constitutional changes, potentially reviving demands for regional parliaments or an English Parliament.
Second, the possibility of another referendum, perhaps following a 2017 UK referendum on British membership of the EU, could perpetuate uncertainty. After the referendum, the UK political landscape is likely to remain in a state of flux. With the likely combination of a more forceful Scottish independence movement, the rise of the UK Independent Party (UKIP) as a political force, the potential change of government in the 2015 elections, and the non-negligible risk of a referendum on UK exit from the EU in 2017, we expect that political risk may remain elevated for some time.
Third, investment projects in Scotland could be put on hold. Fourth, the effect of the outcome of the Scottish referendum on other secessionist movements in Europe is unclear.
The inevitable uncertainty of a “Yes” vote
The biggest questions that would arise in the event of a “Yes” vote are over which currency Scotland would adopt. If the UK keeps its word and forbids Scotland from using the British pound, questions would arise over the future value of the currency in circulation in Scotland. The major banks and a major insurance company have threatened to move their headquarters to London, since there they would have a more predictable environment where the Bank of England could be a lender of last resort. It is unclear whether a new Central Bank of Scotland could perform this critical role, not to mention regulation and supervision. EU membership would be unclear, since this would likely involve tough eligibility criteria, especially in public finances, on which prospects for North Sea oil would partly determine.
Given these uncertainties, DBRS would assess its credit ratings on the United Kingdom, currently at AAA with a Stable trend, with a view to the new constitutional and political arrangements, its new revenue-generating capacity and debt sustainability, and other issues. We would view an independent Scotland as a separate sovereign, which would warrant a separate credit rating.
